The introduction of the pension transfer balance cap (PTBC) system is the most adverse change to superannuation in 30 years. Despite this – and because the Coalition dropped the original, insane idea of introducing retrospective limits on non-concessional contributions – the capital gains tax concessions and other protections built into the new system are reducing some of the pain.
It’s not hard to understand why the limit has been placed on superannuation pension accounts. When you consider that the average superannuation balance, according to a report released in December 2015 by the Association of Superannuation Funds of Australia, was just over $194,000 for males 65 to 69 and just over $117,000 for females in the same age group.
Also, considering I know of many self-managed superannuation fund members with pension accounts in the $3 million to $5 million range, and some members with more than $30 million in pension accounts, these changes were inevitable.
The protection for SMSF members whose balance exceeds the $1.6 million – exempting any unrealised capital gains on assets transferred back to the pension phase of a fund – has removed some of the adverse tax consequences of the changes. This protection has also extended to SMSF members with market-linked pensions, which became popular when they received beneficial treatment under the Centrelink assets test in the mid-2000s.
Advisers with clients receiving market-linked pensions from an SMSF need to understand, however, that in addition to the PTBC of $1.6 million, the defined benefit income stream cap also applies.
The value counted under the PTBC is calculated differently from other defined benefit pensions. Rather than the annual pension value being multiplied by 16, the value is calculated by multiplying the annual entitlement by the market-linked pension’s remaining term.
In recognition of the fact that market-linked pensions cannot be commuted, the PTBC regulatory system does not require, in the event that the value of a market-linked pension exceeds the $1.6 million limit, the excess to be commuted and withdrawn from superannuation or rolled back into an accumulation account.
For example, if a client has a market-linked pension with an annual pension entitlement of $90,000, and at July 1, 2017, the pension has another 22 years to run until its completion, the value counted for PTBC purposes is $1.98 million.
If this client had only the market-linked pension they wouldn’t need to do anything with regard to the excess value in it. However, if they also received account-based pensions they would need to commute all of them back to accumulation to avoid excess transfer balance tax.
Although an SMSF member is not required to withdraw the excess value of a market-linked pension, they are subject to the defined benefit limit pension cap of $100,000 a year. Where a market-linked pension exceeds $100,000, members can end up paying tax on the excess, depending on what other sources of taxable income they have.
Under the defined benefit pension income stream rules, 50 per cent of the excess over $100,000 must be included as assessable income for the member. If the member has no other assessable income, after taking account of the low-income tax offset and the seniors tax offset, this would mean they could receive a market-linked pension of $150,000 a year and still not pay tax on that income.